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Step-By-Step Guide to Debt Collection

The following article published by LegalShield. As a  LegalShield member, you will have the dedicated support of a law firm licensed in your state for as little as $40 a month. Email for more information.

Debt collection is frustrating for small business owners who often lack the time and resources to manage collection efforts. The process of collecting a debt begins long before an account becomes delinquent. The following steps may help decrease the need for debt collection and improve the success of collections if they are required. 

Step 1: Payment Policy

It is vital to secure your interests with policies, contracts and systems that protect your ability to collect a debt. Handshake deals and verbal agreements are difficult to enforce. It is essential to have a signed contract for any product or service for which payment will be made at a later date. Your contract or agreement should include a uniform payment policy. Your payment policy should include exact due dates or a timeline for payment, the name of the individual or business responsible, accepted forms of payment and any potential fees or interest for delinquent payment.

Step 2: Accounting

Accurate and detailed accounting will help you quickly identify and deal with delinquent accounts. Your clients should always know where their account stands. Provide them with itemized invoices that include a specific due date for payment.

Step 3: Act Quickly

Some business owners hesitate to take action because they worry about upsetting customers. If a customer is delinquent, contact them immediately and consider placing a hold on their account. Allowing a past due account to continue accruing debt without giving notice will decrease the likelihood of successful collections. Send out a past due notice that includes the total amount owed, the number of days past due, the original due date and any late fees or interest owed.

Step 4: Know the Rules

It is illegal to threaten, harass or intimidate customers who are unable to make payment. Never threaten an action you are not willing or legally allowed to take. Keep in mind, a customer who is behind now may make good on their obligation and become a valuable customer. Original creditors are generally regulated by state law, which may vary greatly. The Fair Debt Collection Practices Act (FDCPA) regulates collection agents, law firms and other third party debt collectors. Violating state or federal regulations could result in legal action. Make sure you are compliant with the appropriate laws in regard to charging interest or late fees on past due accounts. Call your LegalShield provider law firm to learn more about the laws where you do business.

Step 5: Call Your Provider Law Firm

Utilize your LegalShield membership benefits. One of the greatest benefits of your LegalShield small business membership is having an attorney draft collection letters on behalf of your business. The attorney may review your documentation and draft a letter directly to a debtor to formally request payment. Your provider law firm may also assist you if additional legal remedies are necessary.

Step 6: Documentation

You should carefully document your collection efforts. Your records should include letters and emails, as well as the dates and times of any phone calls or meetings. This documentation and your accounting records will be your primary evidence should a matter go to court. Being detailed and organized will greatly improve your chances in court.

Step 7: Negotiate

Some customers simply do not have the funds to make a one-time payment. Try working with the customer to determine if installment payments or a one-time payoff are feasible. You should document any agreement you make in writing and have the customer sign a copy acknowledging the terms. Your LegalShield provider law firm can help review your agreement prior to signing.

Step 8: Legal Action

In some instances, small claims court may offer the most reliable and efficient means to resolve a collection matter. In order to be successful in small claims court you must be well prepared. States have varying thresholds for what amounts can be disputed in small claims court. For instance, in Virginia a claim may not exceed $5,000, while in California a claim may not exceed $10,000. If your matter exceeds the threshold for small claims court, talk to your LegalShield provider law firm. Find out the statutes of limitation for collecting debt in your state and make sure you file in a timely manner.